Differentiating between real assets and fake assets

There is a difference between how the author of “Rich Dad Poor Dad” defines “asset” and how accounting schools define it.

If you want to be financially rich, you must understand the definition of an asset so you can invest in real assets and avoid an investment made to acquire fake assets.

Accounting schools define an asset as a resource that a person owns or controls that has economic value. So an asset is based on ownership or control.

However, Rich Dad defines an asset as something that puts money in your pocket. This means it is based on the direction of cash flow.

Some people use both definitions. But, if you wish to invest like the rich, Rich Dad’s definition is more realistic.

Is your car an asset?

Accounting schools see your car as an asset as it is an item with economic value.

Thus, if you purchase a Myvi for RM50,000 with a RM5,000 down payment and a RM45,000 loan, this is your financial statement:

Meanwhile, according to Rich Dad, your car is only classified as an asset if it earns additional income which exceeds its expenses on a regular basis.

Typically, your car is a liability or “fake asset” unless you are able to make profits regularly from its usage.

Are unit trust funds ‘real assets’?

Once again, it depends on the direction of cash flow from your unit trust funds.

Are you receiving regular income distributions from your unit trust funds? If “yes”, then the next question is: Does the income exceed the annual management and trustee fees?

Here’s the bottom line:

  • If you’re earning more income distribution than the annual fees paid, it’s a real asset.
  • If you’re paying more annual fees than income received, it’s a fake asset or liability.

But, what about capital gains? What if your unit trust investments go up in price in the future despite you paying more fees than income earned along the way?

Is it still a fake asset? A liability? Yes, it is still classified as a fake asset until you sell it off for a profit, which is what most people hope for in the future.

Here’s an example:

Unit trust funds are often promoted as retirement schemes. You are advised to “invest” for the long-term, could be 10, 20, or 30-plus years periodically, either monthly, quarterly, semi-annually or annually via the virtues of dollar-cost averaging into the preferred unit trust funds until such time when you retire.

In that period when you’re contributing to the unit trust funds, the financial statements would look like this:

From the two statements above ie Unit Trust Investors and Unit Trust Corporation, you can see how the rich invest differently from others.

1. Cash flows

Unit trust corporations are cash flow investors. They know what real assets are: the unit trust investors.

They hope that unit trust investors remain faithful in contributing capital into their funds so that they can receive recurring income via fees for many years.

2. Market risk

Unit trust corporations are low-risk investors because their income is recurring and will flow into their bank accounts in all types of market conditions, good or bad in the future.

In good market conditions, they collect higher fees as the value of their unit trust funds increase.

In bad market conditions, they collect lower fees as the value of their unit trust funds decrease.

In a nutshell, unit trust investors invest 100% of their money into preferred unit trust funds, take 100% of the investment risk, and will only find out if the funds invested turn out to be real assets or fake assets down the road.

Meanwhile, unit trust corporations are guaranteed a steady flow of income (cash flow) through annual fees for as long as they have capital in their unit trust funds. They are not obligated to compensate you if you lose money in a market downturn (risk protected).

Are your stocks ‘real assets’?

There are 900-plus public-listed companies on Bursa Malaysia. How do you tell which stocks are real assets and which are fake? Again, it all boils down to cash flow from your stock investments.

Do you collect increasing dividends regularly from your stock portfolio? If you do, then your stocks are real assets as it is producing cash flow on a regular basis.

What if you’re investing for capital gains? There are several kinds:

1. You invest in cash flow companies

These investors are cash flow oriented and invest in stocks that produce both profits and cash flows consistently to its shareholders. Why?

Stocks which have cash flow can choose to reinvest into expanding their businesses, making investments to buy up competitors, form joint-ventures, acquire assets such as properties, hotels, plantation estates etc to make additional earnings or cash flows in the future.

Hence, the prices of these stocks are revalued higher as they have increased their income by having more income-producing assets.

Stocks with rising cash flow (real assets) tend to bring long-term capital gains.

2. You are a stock better, gambler, and speculator

Some identify themselves as “stock traders who invest for growth”. This is a classic example of an identity crisis.

You are confused as do not know the difference between a stock investor and a stock trader. If you don’t have a game plan, you are a stock speculator.

If you want to identify a stock that is a real asset, look at the cash flow by studying the financial statement. Only then invest.

What about properties?

Is your house an asset?

If you’re collecting a monthly rental income, where it is more than all of your property-related expenses such as interest portion of your mortgage, maintenance fees, quit rent, assessment, repairs, this property is a real asset.

But, if you stay in your own house, it is a fake asset or a liability. It is cash flow that determines the value of a property.

Some opine that real estate is a good investment because it doubles in value every 10 years.

People buy properties at RM500,000, hoping that it can be sold at RM1 million after 10 years.

Fast forward to 2030, and you intend to sell your property for RM1 million. Can you find buyers earning six-figures annually with RM200,000 cash-in-hand to buy your million-ringgit property?

This article was published in kclau.com

Ian Tai is the founder of DividenVault.com, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks that pay ever-growing dividends year after year.

Source : MSN

Do you really know about your net worth? If not, this article is good for
Have you heard that your friends or older said that you must buy house? They

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.